In Concord Steel, Inc. v. Wilmington Steel Processing Co., Inc., 2008 WL 902406 (Del. Ch., April 3, 2008), read opinion here, the Chancery Court upheld the portion of an Asset Purchase Agreement (ASA) that prevented the seller from competing against the business it sold for 4 years. In the context of a preliminary injunction motion, the court found: (i) a probability of success on the merits of the claim that the covenant of noncompetition was violated. The court also found that (ii) an imminent threat of irreparable injury was shown, and that (iii) the balance of equities tipped slightly in favor of the plaintiff.
Procedurally, it is notable that, while not done at the lightening speed of a TRO motion, this PI motion was still decided quite expeditiously. Argument was heard in March 2008 after suit was filed in November 2007 and extensive discovery was taken and pre-trial briefs were submitted over the end of year holiday season.
The standard for granting a preliminary judgment motion was carefully recited a pages 3 and 4 of the Westlaw version of the 15 page opinion (that would be about 45 pages in the slip op. format.) The court reviewed the extensive factual background including what it referred to as: "The ASA … a complicated, 53 page agreement, and the nonsolicitation and noncompetition covenants are particularly convoluted."
The court also reiterated basic contract interpretation principles. Although these principles are well-known and often summarized on these pages, a few gems are worth repeating:
" A contract is not rendered ambiguous solely because parties do not agree as to its construction." Also, "extrinsic, parol evidence cannot be used to manufacture an ambiguity in a contract that facially has only one reasonable meaning." However, under the parol evidence rule, "where the language of a written integration is susceptible to more than one reasonable interpretation, the court will consider profferred admissible evidence bearing upon the objective circumstances relating to the background of the contract".
The opinion also includes at page 5 the essential elements of an enforeceable contract. Basic stuff but I find it helpful to periodically review fundamental principles.
At page 6 and footnotes 42 and 43, the court lists the prerequisites for enforceability of a covenant not to compete, and cites to several Delaware decisions upholding such agreements, the elements for which must be proven by "clear and convincing evidence." See also footnote 52.
Several cases are cited at footnote 86 in which the Delaware courts have found the irreparabale harm necessary for a PI where a covenant not to compete is breached, in light of the "loss (or foreseeable loss) of client goodwill…" At footnote 89, the court collects cases that recognized, as here, a stipulation of the parties that irreparable harm would be suffered in the event of a breach.
Finally, on an issue of apparent first impression in Delaware, the court observed that even though Chancery Court Rule 65 requires that a bond be posted when an injunction is granted, in the agreement involved in this case, the parties agreed that the bond requirement would be waived, and the court enforced that provision–especially as the agreement was the result of protracted negotiations between sophisticated, well-represented parties.
However, the court cautioned in footnote 92 that: " I do not intend the absence of a bond requirement … to diminish in any way Concord’s potential liability for any damages Defendants incur, if the preliminary injunction proves to have been granted improvidently."